چکیده انگلیسی

In this paper, we analyze the emerging retail practice of carrying a combined product assortment consisting of both regular “standard” products and more fashionable and short-lived “special” products. The purpose of this practice is to increase store traffic by attracting heterogeneous classes of customers, which drives up sales of standard products due to the potential cross-selling effect. Customers who are primarily attracted by special products will also buy some standard products. In this context, we analyze three decisions that are crucial for a retailer׳s commercial success: the product assortment, the inventory levels and the pricing. We propose an optimization model and an iterative heuristic to analyze the trade-offs between the combined product assortment, the inventory level and the price per product when there is limited shelf space. Using numerical experiments, we show that our heuristic can be trusted and that its accuracy improves when the number of products increases. Our findings indicate that to attract more customers for standard products, a retailer may benefit from carrying low priced special products which, if considered in isolation, would be non-profitable. As the cross-selling effect decreases, a retailer should focus more on the standard assortment by increasing its size and decreasing the prices. However, introducing special products and ignoring the cross-selling effect may decrease a retailer׳s profitability. We show that the introduction of special products involves more than just choosing the right specials for non-loyal customers but impacts the global assortment planning, the standard products and the products pricing.

مقدمه انگلیسی

Product assortment, inventory and price planning are mutually dependent strategic decisions of crucial importance for a retailer׳s commercial success. A retailer needs to consider these decisions jointly, with the purpose of attracting more customers, satisfying their demand and, ultimately, maximizing his profit subject to various constraints, such as limited shelf space for displaying products.
Recently, the retail practice of combining “standard” and “special” products in the total assortment has emerged and been adopted by an increasing number of retailers. The assortment of standard products is relatively stable over time, which means that customers expect to find them every time they shop. This type of products may also be called “fixed products” [6]. The main objective of the standard assortment is to support the positioning and profitability of a retailer [38]. Standard assortment items also serve as a strategic tool to attract and retain loyal customers, i.e. customers who regularly visit the store for their customary shopping and grow accustomed to a certain product range [12]. Accordingly, in general, the price of a standard product is stable and balances its attractiveness with the long-term profit it should generate.
Special products, by contrast, are offered only temporarily, in limited quantities and usually at very attractive prices. Alternative names for this type of products are “loss leaders” or “variable products” [6]. They are typically replaced by a new collection of items within a short period (a few weeks or less). Although special products may provide retailers with slim profits (or potentially be loss making if considered in isolation), they are critically important because they help increase overall store traffic by attracting non-loyal customers to a store. Non-loyal customers do not regularly visit the same store but are rather opportunistic and are occasionally attracted by special offers. This increased store traffic can also boost sales of standard products, resulting in increased overall sales and profits. The demand flow generated by non-loyal (respectively loyal) customers for standard (respectively special) products is called the cross-selling effect. The pricing of special products is thus an essential element and should above all aim to attract non-loyal customers and eventually increase the cross-selling effect. Moreover, studies show that customers drawn to promotions not only enjoy shopping but also gain a sense of achievement by buying items on special offer [28]. For retailers, providing customers with this sense of achievement by rotating special assortment items might be preferable to promoting standard assortment items, since it allows retailers to maintain a steady sell-through of standard items and avoids the erosion of established price points.
The practice of carrying a combined assortment is especially widespread in the grocery industry. Walmart, for example, offers a wide range of standard product categories – from food and clothing to home electronics – as well as a limited number (around 1% of the total assortment) of weekly “special buys” in order to create excitement [28]. Lidl and Aldi, two of the most successful discount retailers, compete effectively with a very narrow product assortment, consisting of standard products such as tooth-paste and orange juice, to which special assortment items are constantly added (called “surprise buys” or “special items”). Aldi׳s special assortment, for example, consists of non-food, very diverse products introduced twice per week for 1-week intervals. These products may be electrical items, clothing, sports equipment or pet toys and are rotated throughout the year according to the season (e.g. “back to school” special items or ski wear) with the aim of keeping the shopping experience in the store interesting [41] and [21]. The number of these “special items,” however, varies substantially in percentage terms between the two retailers (approximately 9% for Lidl versus 4% for Aldi).
In this paper, we devise a stylized mathematical model to address the integrated product assortment, pricing and inventory optimization problem taking into consideration the role of both standard and special assortments in generating store traffic when the available shelf space is limited. The proposed integrated approach explicitly models the interdependence between the total assortment decision, the pricing, and the number of customers attracted to the store and the demand per product. In general, a broader product assortment would attract more customers, thus increasing demand for products, but would it also increase operational and inventory cost in a limited shelf space configuration. Product price is another significant factor that has a direct impact on customers׳ product choice and consequently on demand for a product. It cannot be considered in isolation from comprehensive combined assortment planning including standard and special items. According to McKinsey and Company study [31] “for most companies, better management of pricing is the fastest and most cost-effective way to increase profits”. For instance, during the economic recession in 2009 when customers became more price sensitive, Lidl was able to drive down the prices of its products compared with other supermarkets in the UK [35]. Although the marginal profit per product decreased, Lidl experienced an increase in its market share from 2.2% to 2.4% [36] due to the increased demand. The importance of considering assortment, pricing and inventory decisions jointly is illustrated in the case of JCPenney. The department store chain received the 2004 Fusion Award in supply chain management for “its innovation in integrating downstream to merchandising and allocation systems and then upstream to suppliers and sourcing.” A JCPenney vice president attributes the company׳s success to the fact that, “assortments, allocations, markdown pricing are all linked and optimized together” [26].
The rest of the paper is organized as follows. In Section 2, we review the related literature. In Section 3, we present the problem and the mathematical model. In Section 4, we propose a heuristic solution procedure for our problem, and assess its accuracy on instances with 5–15 products. In Section 5, we present and discuss illustrative examples and insights on larger problem instances (60 products). In Section 6, we conclude our study.

نتیجه گیری انگلیسی

This paper contributes to the understanding of the problem of joint product assortment planning, inventory management and price optimization. In particular, we considered an assortment consisting of two different types of products – “standard” and “special.” On the one hand, standard products are offered all year round and aim to attract and retain a steady flow of loyal customers. Special products, on the other hand, usually have a lower profit margin and a shorter sales period and aim to increase store traffic by attracting non-loyal customers who also buy some of the more profitable standard products (cross-selling effect). We included the shelf space limitation and used different inventory management policies for the two types of products depending on their characteristics. Furthermore, we developed a demand model based on the MNL model to capture customers׳ preferences and price sensitivity as well as the store choice process and the cross-selling effect.
The joint product assortment, inventory and price decision is a complex and challenging task for the retailer. Our research sheds light on the underlying complexity by developing a profit ratio heuristic that could assist the retailer in practice. We compared our approach with different strategies that are commonly adopted by retailers. According to our results, a retailer may benefit from a combined assortment if it is selected taking into consideration the cross-selling effect that occurs. In this case, it is even profitable to include some special products with slim profit margin, deciding low prices due to the increased demand flow for more profitable standard products, which eventually increases the overall profit of the total assortment. Our experiments illustrate that special products are primarily intended to increase store traffic, while standard products aim to increase profit. Conversely, if the retailer includes special products in the assortment but ignores the cross-selling effect, it loses a significant amount of profit. It could thus be more profitable for him to carry only standard products. Moreover, the strength of the retailer׳s competitors affects both the assortment and the pricing decisions. In particular, an increase of competitors׳ strength leads to a decrease of products׳ prices and an increase of the assortment size while the overall profit decreases. The demand variability is another factor that affects not only the inventory decision but also the assortment and pricing strategy. According to our findings, an increase of the demand variability for both standard and special products leads to a lower number of special products with higher markup price and higher inventory level in order to satisfy the unpredictable demand. Meanwhile, standard products׳ prices decrease to overcome the demand decrease resulting in a lower overall profit. Furthermore, when the price sensitivity of loyal and non-loyal customers increases, the cross-selling effect decreases. The retailer should then focus more on standard products by increasing their number and reducing their price in order to keep demand high. This leads to lower profit but still brings more profit than not including special products at all. This holds true even when an error term is included in the estimations of customers׳ price sensitivity and utility thresholds.
This work offers several avenues for further research. In this paper, we assumed that each product constitutes a unique category. In a possible extension of our work, we could include more than one product per category, thus allowing dynamic substitution between products. This feature could further differentiate standard and special products, as the latter can typically not be substituted. Such an extension would complicate the problem but it might enable further insights into how the product substitution would affect products׳ demand, inventory management and the assortment decisions. In another possible extension of our paper, the number of loyal and non-loyal customers may not be fixed a priori but evolve dynamically. For instance, a non-loyal customer might become loyal after a certain number of visits to the store. The examination of the impact of the dynamic definition of customer types on product assortment could offer a more realistic representation of the problem, providing further valuable managerial insights to retailers. Furthermore, our model could be adjusted to address more general problem settings where product assortment does not consist of a priori distinguished standard and special products; but where, instead, heterogeneous products (in terms of attractiveness and inventory costs) and customers (in terms of their preferences and price sensitivity) are taken into consideration. Based on our heuristic we could then examine how different factors such as price competitiveness or space availability may affect the joint product assortment, pricing and inventory strategy of different types of retailers such as convenience stores, boutiques or discounters.